February 28, 2008

Signs your finances are in trouble

The loss of a job, a sudden illness or another crisis can spell financial trouble for any family. Sometimes, however, people make small mistakes that add up over time to create big problems for their finances, according to the California Society of CPAs (www.calcpa.org).

CPAs recommend that you watch out for these warning signs that can signal potential financials pitfalls.

No budget
With a budget, you can take stock of how much money you have coming in each month, what your expenses are and what's left over once you've paid them.

Without this realistic assessment, it's easier to spend too much -- often without even realizing you've done it -- and harder to reach your financial goals.

Budgeting is an important first step in managing your money, so take the time now to itemize each month what you earn and what you spend.

Outspending the budget
Creating a budget is a good start, but then you have to follow it.

If you find yourself spending far more on discretionary items such as entertainment or clothing than you budgeted for, it's time to cut back.

If you want to splurge, set aside some cash each week for fun, but don't spend more than you planned for.

Minimum payments
Credit cards make it easy to spend, but they can be tough to pay off if you charge too much. If you make only minimum payments on your debt each month, a $1,000 debt can take up to 22 years to pay off.

And during that time, you will continue to pay interest charges well in excess of your original purchases.

If you find yourself in this position, limit future spending by cutting back to just one card that you use only in emergencies. Then chart a new budget that will allow you to increase your monthly payments and begin reducing the size of your debt.

Using one credit card to pay off another is a clear sign that your spending is seriously out of control. It's also an expensive way to manage debts since instead of erasing your outstanding balance you are simply shifting it to a new card with its own interest payments.

A related warning sign is using your credit card to pay for regular expenses -- such as food, rent or car payments -- because you don't have enough cash to cover those costs. There are both indications that it's time to rein in spending.

No savings
Families are saving less than they have in the recent past and taking on more debt, according to the Federal Reserve. Without a savings cushion, it's harder to bounce back from financial setbacks and less likely that you'll be able to afford vacations and other indulgences.

To fix this problem, start with small weekly deposits to a savings account. Stick with your savings plan and you'll be amazed how your balance will add up over time.

As part of the profession's 360 Degrees of Financial Literacy program, CPAs have created a special Web site to help people with all their financial concerns: www.360financialliteracy.org/. The site contains many articles and tools that you can use to gain control over your financial life. Remember, too, that your local CPA can offer smart ideas and recommendations to help you with any aspect of your finances.

To listen to podcasts with more financial tips, go to http://www.calcpa.org/Content/community/financialempowerment.aspx.